Welcome to Open Science
Contact Us
Home Books Journals Submission Open Science Join Us News
Empirical Analysis on the Causal Connection between Money Supply and Stock Prices in India
Current Issue
Volume 1, 2014
Issue 1 (January)
Pages: 1-9   |   Vol. 1, No. 1, January 2014   |   Follow on         
Paper in PDF Downloads: 39   Since Aug. 28, 2015 Views: 1770   Since Aug. 28, 2015
Authors
[1]
Sarbapriya Ray, Shyampur Siddheswari Mahavidyalaya, Dept. of Commerce, University of Calcutta, India.
Abstract
Stock market is a crucial ingredient of the financial system of any economy as it plays a fundamental role in channelizing savings from deficit sector to surplus sector. Money supply, whether it is unanticipated or anticipated by people, is one of the component of monetary policy that reserve bank of India (as central bank) uses, affects the stock market. This study aims to examine the long run and causal dynamic relationships between the money supply and stock prices in India using the time period 1990-91 to 2010-11 for India. The cointegration test confirmed that money supply and stock prices are cointegrated, indicating an existence of long run equilibrium relationship between the two as confirmed by the Johansen cointegration test results. The Granger causality test finally confirmed the presence of bi-directional causality which runs from money supply to stock prices and vice-versa. Regression result suggests that money supply has positive significant effect on stock prices in India. The effect of money supply on stock prices is statistically significant with the appropriate sign. This signifies that increase in money supply leads to increase in liquidity available for buying securities that eventually results in upward movement of nominal equity prices and vice versa. Future studies to be conducted by the prospective researchers in this particular area of financial economics would suppose to include more comprehensive indices to capture the effect on stock prices through change in money supply.
Keywords
Stock Price, Money Supply, India, Causaliy, Cointegration
Reference
[1]
Dickey, D. A. and Fuller, W. A.(1979), “Distribution of the estimators for autoregressive time series with a unit root.” Journal of the American Statistical Association, vol.74(336): pp.427-431.
[2]
Engle, R.F. and C.W.J. Granger(1987), “Co integration and Error Correction: Representation, Estimation, and Testing.” Econometrica, vol.55: pp.251-276.
[3]
Engle, R. & Granger, C. W.J. (1987), Co-integration and Error Correction: Representation, Estimation and Testing, Econometrica, vol.35, pp.251-276.
[4]
Engle, R. & Granger, C.W.J, (1991), Eds, Long Run Economic Relations: Readings in Cointegration, Oxford: Oxford University Press
[5]
Granger, C.W.J. (1969), Investigating Causal Relations by Econometric Models and Cross-spectral Methods, Econometrica, vol.37, pp.424-438.
[6]
Giles, D., E., A., J., A., Giles and E., McCann(1992), “Causality, Unit Roots and Export Led Growth: The New Zeland Experience”, Journal of International Trade and Economic Development, vol.1, pp. 195-218.
[7]
Granger, C. W. J. (1981), “Some properties of Time Series Data and their use in Econometric Model Specification”, Journal of Econometrics, Annals of Applied Econometrics, vol.16: pp.121-30.
[8]
Granger, C.W.J (1986), Developments in the Study of Cointegrated Economic Variables. Oxford Bulletin of Economics and Statistics, nr. 48.
[9]
Granger, C. W. J. and Newbold, P. (1974), "Spurious regressions in econometrics". Journal of Econometrics ,vol.2 (2): pp.111–120.
[10]
Greene,W.H. (2003), Econometric Analysis. Pearson Education, 5th Edition, 382.
[11]
Johansen, S., Juselius, K., (1992), Structural hypotheses in a multivariate cointegration analysis of the PPP and UIP for UK. J. Economics ,vol.53, pp.211-244.
[12]
Johansen, S. (1996) Likelihood-Based Inference in Cointegrated Vector Autoregressive Models, 2nd edition, Oxford University Press.
[13]
Johansen, S(1988), “Statistical Analysis of Cointegrating Vectors.” Journal of Economic Dynamics and Control, vol.12,pp. 231-54.
[14]
Kwiatkowski Denis, Phillips. Peter C.B, Peter Schmidt and Yongcheol Shin (1992), Testing the null hypothesis of stationarity against the alternative of a unit root, Journal of Econometrics,vol.54, pp.159-78.
[15]
MacKinnon, J. G., 1991. Critical values for cointegration tests, In: Engle, R. F. and Granger, C. W.
[16]
F. (Eds.), Long-Run EconomicRelationships, Oxford University Press, Oxford.
[17]
Mukherjee, T.K. and A. Naka, (1995), “Dynamic Relations between Macroeconomic Variables and the Japanese Stock Market: An application of a Vector Error Correction Model”, The Journal of Financial Research, 2.
[18]
Reserve Bank of India (2011), Monetary Policy Statement 2011-12.
[19]
McMillan, D. G., 2001. Cointegration Relationships between Stock Market Indices and Economic Activity: Evidence from US Data, Discussion Paper, Issue No. 0104, Centre for Research into Industry, Enterprise, Finance and the Firm (CRIEFF), University of St.Andrews, Scotland.
[20]
Pesando, James E.(1974), “The Supply of Money and Common Stock Prices: Further Observations on the Econometric Evidence.” The Journal of Finance, vol.29(3): pp.909-921.
[21]
Panda, C. and Kamaiah, B.(2001), “Monetary policy, Expected Wholesale price index, real Activity and Stock Returns in India: An Empirical Analysis”, Asian African Journal of Economics and Econometrics, Vol. 1, 191-200.
[22]
Phillips, P.C.B and P. Perron (1988), "Testing for a Unit Root in Time Series Regression", Biometrika, vol.75,pp. 335–346
[23]
Reserve Bank of India (2012), “Money Market and Monetary Operations in India”, Speech by Deepak Mohanty, Executive Director, Reserve Bank of India, atthe Seminar on Issues in Financial Markets, Mumbai, December 15, 2012.
[24]
Sims, C. A. (1972): Money, Income and Causality, American Economic Review, vol. 4, pp. 540–542.
[25]
Sellin, Peter(2001), "Monetary Policy and the Stock Market: Theory and Empirical Evidence." Journal of Economic Surveys, vol. 15(4 ),pp.491-541.
Open Science Scholarly Journals
Open Science is a peer-reviewed platform, the journals of which cover a wide range of academic disciplines and serve the world's research and scholarly communities. Upon acceptance, Open Science Journals will be immediately and permanently free for everyone to read and download.
CONTACT US
Office Address:
228 Park Ave., S#45956, New York, NY 10003
Phone: +(001)(347)535 0661
E-mail:
LET'S GET IN TOUCH
Name
E-mail
Subject
Message
SEND MASSAGE
Copyright © 2013-, Open Science Publishers - All Rights Reserved